‘About Debt’ Q&A Series: Debt or Equity — Which is Best to Grow Your Business? (Part 3)

We’re back with the 3rd article of the weekly ‘About Debt’ Q&A Series. This week, let’s find out what the experts say about whether it is ideal for a growing business to use both debt and equity financing!

Q Sandra: “Debt or equity financing, which is best for entrepreneurs with growing businesses?”

A Chi-Ling: “It depends. The decision about whether or not to issue equity or to go and take a loan depends on many factors such as: where the business is in its growth cycle, the economic climate, the existing capital structure (how much debt does the company already have on its balance sheet). But the myth that we are trying to bust is that equity is not the best and only solution for a growing business. So growing businesses should use both debt and equity, the best capital structure is probably one that is a balanced combination of debt and equity. There is another myth that’s out there which is that debt is risky and expensive. But the reality is that debt is usually cheaper than equity, but not always the case, because too much debt is definitely a bad thing. The downside to debt is that you must maintain the ability to pay back the loan and interest in principle on the scheduled payment dates regardless of fluctuations in revenue. And if a company has too much debt or it fails to generate enough cash then the fixed-costs nature of those debt repayments can be a problem. And that’s the basic idea of why people consider debt risky is because you must make those payments on the date they are scheduled to be made. But that should not stop companies with established positive cash flows from taking on a moderate amount of debt if that’s going to help them grow. Some people believe that profitable businesses don’t need debt, but you can actually use debt to help profitable businesses grow. The benefit of debt is that it allows a business to leverage a small amount of money into a much larger sum and you can sustain much more rapid growth than if you didn’t borrow that money. And if the business does well it could well end up being worth far more than the loan originally being taken out.”

Some people believe that profitable businesses don’t need debt, but you can actually use debt to help profitable businesses grow.

<to be continued>